Monetary Policy: Moving Forward

Last week was a week of major monetary policy decisions: central bankers from several countries met to establish monetary policy, including the U.S. Federal Reserve, the Bank of Japan, the Bank of England, and the Swiss National Bank. The looming Brexit vote seems to have cast its shadow everywhere, as central banks hesitated to make any major shifts until after the outcome has been determined, and they can respond to Britain’s decision to either remain in or leave the European Union.

The U.S. Federal Open Market Committee kept interest rates unchanged, with target rates at 0.25 – 0.50%, but still expects to increase the federal funds rate over the next six months. It did lower its forecast for U.S. growth this year and in 2018 to 2.0%, but continues to forecast inflation at its 2.0% target.

The Bank of Japan also held rates steady, with a current negative interest rate of -0.1%. The yen continued its rally against the dollar, hurting Japanese export-focused companies. The Bank of Japan listed steady improvement in business fixed investment, employment, and housing investment as contributing to “its moderate recovery trend.”

In the U.K., the Brexit referendum is the most significant risk, and the Monetary Policy Committee (MPC) suggested that a “leave” vote could significantly affect the outlook for output and inflation. The Bank of England voted unanimously to maintain the Bank Rate at 0.5%.

The Swiss National Bank is maintaining its expansionary monetary policy, with interest on sight deposits to remain at -0.75%.

Central banks — and markets — appear to be in a holding pattern pending the Brexit referendum. While it remains to be seen whether the results of the vote will have immediate economic impacts, there are long-term implications that can affect monetary policy going forward. It’s not surprising that central banks are waiting for the outcome before making any major moves.